Growth of commerce slowing down – taxation undermines competitive strength
On the brink of summer 2018, there was a turn of events that was particularly evident in the amount of revenue in department store trade and wholesale trade*: the three per cent growth witnessed at the start of the year turned down. The growth of specialty goods trade and grocery trade also slowed down. The slowing growth will also continue next year, and unemployment will begin to increase again. The greatest challenge facing commerce is the domestic cost burden, which makes it difficult to compete on a global scale. Value added tax specifically penalises work done in Finland.
In the beginning of last year, investments in housing, machinery and equipment rapidly accelerated the growth of wholesale trade despite the rise of wholesale prices. However, as investments in both construction and industry dwindled, the growth of wholesale trade also slowed down. At the end of the year, the growth of wholesale trade was almost exclusively based on the rise in prices. This year, the amount of turnover is projected to grow by a meagre half per cent, employment by one per cent.
From January to May 2018, the amount of retail business turnover also grew at a rate of three per cent, until it clearly began to slow down, especially led by department store trade. This year, the improving employment across the economic spectrum and the better wage drifts compared to last year are improving the purchasing power despite the inflation, and the retail trade will reach a growth of slightly below 1.5 per cent. Next year, the growth will slow to approximately one per cent. Employment will continue to grow this year by another half per cent.
“The employment figures in the last quarter of last year were worrying for the retail sector: compared to the corresponding dates, employment was at its lowest level since 2005,” says Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation.
Prices are determined by global market, costs at home
The majority of specialty goods trade and everyday domestic utility trade costs are created in Finland. A store procures a variety of goods, hires employees and purchases services: real estate and management services, logistics, marketing, advertising and IT services, occupational health, etc. For instance, of the price of a top made in Asia and sold for EUR 31, VAT constitutes EUR 6 and the costs generated in Finland constitute EUR 19. A further EUR 3 go to the manufacturer in Asia. The trader is left with the remaining EUR 3 for the development of the company, investments and dividends.
“There is not a massive margin to develop your business, if you are trying to compete with prices. The tax authorities take more than what is left for the trader,” says Kurjenoja.
The tax on labour weighs particularly heavily on the consumer price when the company purchases different services. This is why services bought in Finland and employment in Finland specifically should be cut in cost competition. Many global online stores and utility chains gain a competitive edge by the cost-effective concentration and positioning of their operations. Correspondingly, Finnish specialty goods trade seeks to improve operations through, e.g. procurement, logistics and marketing collaboration.
“Competition is good for the consumers and should not be prevented. However, as a result of, for instance, regulation and taxation, Finnish traders cannot compete on a level playing field,” Kurjenoja reminds.
Yet, the services purchased in Finland by Finnish traders are essential for the other sectors and the whole national economy, because commerce nearly doubles its value added to the economy by service and goods purchases and investments.
“For example, the added value to the logistics sector would nosedive by approximately 12 per cent were Finnish traders to buy the equivalent services elsewhere,” explains Kurjenoja.
Finland must attract commercial functions with healthy added value
Global chains, online stores and digital trade platforms rarely engage in R&D to develop their operations in Finland. This work is usually performed in the country or location of the company’s HQ, on which the whole group’s strategic development work is focused. The operating methods or systems developed elsewhere are then adopted – perhaps with slight adjustments – in Finland. The strategic development, planning and operational management of business create more growth than acting as a simple distribution channel, although that is also necessary to increase competition.
According to Mari Kiviniemi, Managing Director of the Finnish Commerce Federation, the positioning of strategic functions and headquarters is important for Finland regardless of the sector, so not purely for industry and banks. “The importance of commerce based in Finland for the whole economy and society is too great to be ignored,” says Kiviniemi.
Policies aimed at future create robust trade
In Kiviniemi’s view, lighter taxation is key for the future of commerce and supporting its vitality:
“Tax on labour accumulates on prices and eats away at our competitive strength, and VAT specifically penalises Finnish work. The tax on labour must be reduced without coming up with new selective purchase taxes or increasing VAT.”
Regulation should be sensible to make Finland an attractive operating environment for all businesses and provide equal operating conditions for everyone. For instance, commerce in Finland should not be subjected to costs and liabilities that do not apply, for instance, to global online trade.
Kiviniemi also emphasises the importance of training and research for the development of commerce. If Finland is lacking in university-level training programmes and research pertaining to commerce and services, then we also lack the preconditions for the development of services.
“Engineering know-how alone does not create consumer services or make us globally commercially competitive. What we need is a deep understanding of customers, commercial strategies and operations, that is, high-level education in the same vein as in Sweden or the United Kingdom,” says Kiviniemi.
*Turnover adjusted for price fluctuations.
Further information:
Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja@kauppa.fi
Mari Kiviniemi, Managing Director, Finnish Commerce Federation, tel. +358 (0)50 511 3189, mari.kiviniemi@kauppa.fi
Appendix:
The Finnish Commerce Federation represents commerce – the largest sector of economic life. Commerce employs around 300,000 people in Finland. The Federation has around 7,000 member companies and represents both retail and wholesale commerce in industry policy and labour market lobbying. Kauppa.fi
